Interviewing Part 6 – Compensating Your Employee
Since each market, industry, and job role is different, it is important to have a customized compensation structure. The right compensation package can mean the difference between mild success and extraordinary success.
Many sales-based business owners have chosen to compensate employees with a tiered commission structure based on sales performance in conjunction with an hourly wage. Keep in mind that if an employee’s base pay is too high, the employee may not be as motivated to drive more sales because their wages are anticipated and expected regardless of their performance.
One measure of sales performance is an employee’s monthly Gross Profit (GP) which we define as all revenue collected minus cost of goods sold. Monthly GP is an excellent universal measure of performance, is comparable over time as well as amongst multiple employees. It is also a good signal to the health of the business.
Awarding commissions based on units sold alone can be misleading because these figures do not indicate the quality of the sale or how much revenue is brought to the store. Unfortunately, compensating employees based on units sold can also contribute to the employees offering huge discounts to push more sales and move more products, which at times may be below set price and against the store policy, with the intentions of improving their paycheck, but not necessarily the bottom line for the store. The compensation structure should encourage employees to sell on value.
For other industries where the employee is not selling a specific product or service, most companies choose to only offer hourly or salary wages. The problem with this is that the employee won’t feel compelled to accomplish more tasks / projects because he or she will know that the pay will be the same not matter what. A suggestion to help change this thinking is to offer quarterly bonuses based on the amount of projects completed in the previous quarter. Setting realistic expectations, earnings amount, and practical deadlines to these projects can make or break this program. Prior to assigning a project, I recommend that the supervisor sits with the employee, outlines the project, the potential bonus earnings for completing the project, gives a specific deadline, and gives realistic expectations to the level of proficiency involved with the project. Outlining these key areas will also help the employee know what exactly is expected of him or her, thus helping decrease employee turnover.
Are you in an industry where compensation is generally compensation, salary, or hourly based? Do you have the potential to earn more money with bonuses?